A Bite Of The “Refreshed” Apple

International | Jun 14 2024

Apple Intelligence has arrived and with it a whole new narrative around the extraordinary growth in market capitalisation and earnings being driven by generative Ai; what did Apple actually reveal to the market?

-Big Tech just became a whole lot bigger
-Why Apple Intelligence matters, bringing GenAi to the masses
-Selling the experience not the technology

By Danielle Ecuyer

2024 just got more extraordinary

There is no denying 2024, thus far, is turning into an extraordinary year, with US markets continuing to rally to all-time highs and Big Tech engaging in what Dan Ives from Wedbush Securities describes as an 'Ai arms race’.

Ives wrote “The Ai revolution starts with Nvidia and in our view the Ai party is just getting started as it’s 9pm in a party going till 4am with the rest of the world now joining”.

For a while the market rated Apple like it had missed the GenAi party, but at this week’s Worldwide Developers Conference (WWDC), Apple laid to rest investor concerns about its agenda for building out on-device artificial intelligence capabilities.

What started as a yawn, sending the stock price down -2% on Monday’s trading, translated into an off-to-races moment on Tuesday and Wednesday.

Apple stock has rallied nearly 11%, and closed off a Wednesday intra-day high of up 14%, adding around US$260bn in market capitalisation to US$3.26trn over two days.

So why is the market so hyped up on Apple?

Morgan Stanley sums up the significance of WWDC as the establishment of important building blocks of on device GenAi capabilities, which will drive the next Apple product refresh cycle starting in FY25.

The analyst points to the device replacement cycles as the main driver of the stock’s outperformance, both historically and over the longer term.

Hatem Dhiab, from Gerber Kawasaki Wealth & Investment Management, highlights the marketing genius of Apple, stating “leave it to Apple to rebrand Ai to Apple Intelligence. Ultimate power play”.

The announced Apple Intelligence system is a “new personal intelligence system” notes Morgan Stanley which will be driven by in-house developed small language models (SLMs) and large language models (LLMs) with assistance from the OpenAi/ChatGPT partnership, if required.

UBS underplays the importance of the OpenAi/ChatGPT integration and points to Apple using an on-device circa 3bn parameter foundation model (SLM) which is trained for specific functions and tasks such as summarising, proofreading or generating email responses, as well as simplifying applications across apps and generating colourful emojis.

Laugh you may, when you think where Siri is now, but as Apple commentators highlighted, Apple is bringing GenAi to the masses and the upgrade in Siri will be integral to the offering.

The Apple refresh cycle became a lot fresher

Potentially 1.5bn Apple users may eventually shift to the new Ai enhanced products and Ives estimates some 270m iPhones have not been upgraded in more than four years.

Morgan Stanley stresses the announced Apple Intelligence functionality is limited to the existing devices with the A17 Pro of M-series chips, which represent around 8% of the current iPhone and iPad installed base.

Importantly, Dhiab points out it is the development of “its own Ai chips to support Ai inferencing in its own data centres (i.e., Apple Chips in Data Centres or ACDC)” that is so significant.

In house chips ultimately assist with privacy issues, which was a big topic for Apple at WWDC, allowing for a closer inference with the integration of the hardware and software.

UBS describes the system as “a new server solution running a new OS (operating system) and new machine learning stack on Apple silicon (chips) to mitigate privacy risk”.

Apple went to some lengths in depicting the extent and importance of the privacy features for users.

Looking for the bearish Apple news

With so much for investors to be bullish about, Morgan Stanley tried to pour some cold water on the initial excitement and points to a lack of details around the impact on battery life. 

UBS pushes back against any concerns and has calculated the circa 3bn parameter small language model would only use 3GB of memory on device, compared to the existing 15 Pro/Max iPhone with 8GB of memory. The new iPhone 16 will be available in the September quarter.

Apart from Apple Ai, Morgan Stanley observed the distribution of Vision Pro extends to China, Hong Kong and Japan with pre-orders starting June 13th and pre-orders for Australia, Canada, France, Germany, and the UK starting on June 28th.

The real kicker for the bulls though is the potential for app developers to evolve Ai-focused apps built upon Apple’s Ai tech stack, says Ives, which has the upside to create bundled subscription services over time.

Ultimately the WWDC announcements came as no surprise says Dhiab, “the big difference was in the focus on how these tools will integrate the whole suite of Apple ecosystems and applications" and "how much better our lives will be using Generative Ai".

Morgan Stanley has a price target of US$216 with an Overweight rating and In-Line Industry View.

UBS is Neutral rated alongside a US$190 target price.

The race to the US$4trn market capitalisation between Microsoft, Apple and Nvidia is on says Ives. 

Who will be the Ai King?


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